Next on the list, deflation fighter extraordinaire, Telegraph writer
Ambrose Evans-Pritchard, picked up on Lagard's commentary and screamed at the
top of his lungs "More Bubbles! We need bigger and bigger bubbles to combat
the threat of deflation!"

Of course Pritchard did not state it precisely that way, but it is indeed
exactly what he called for, in equally loud, unmistakable tones.

World Risks Deflationary Shocks

It is a remarkable state of affairs that the G2 monetary superpowers - the
US and China - should both be tightening into such a 20pc risk, though no
doubt they have concluded that asset bubbles are becoming an even bigger
danger.

Tightening? What Tightening?

Pritchard calls a decrease in asset purchases by the Fed from $85 billion
a month to $65 billion a month "tightening". The claim is preposterous.

It's very much like telling an obese child you can only have three pieces
of cake after dinner, not four.

Correctly viewed, tapering asset purchases is a reduction in stimulus, not
tightening.

Actual Tightening in Emerging Markets

Pritchard discussed Turkey, South Africa, India, Brazil, Indonesia, and every
other country that actually did tighten recently, but he never addressed the
reason they had to: inflation was completely out of control in those countries,
with obvious asset bubbles in many of them. Tightening should have started
long ago.

Spotlight on Europe

Eurostat data show that Italy, Spain, Holland, Portugal, Greece, Estonia,
Slovenia, Slovakia, Latvia, as well as euro-pegged Denmark, Hungary, Bulgaria
and Lithuania have all been in outright deflation since May, once tax rises
are stripped out. Underlying prices have been dropping in Poland and the
Czech Republic since July, and France since August.

Spotlight on Japan

No reputable deflation fighter could possibly leave Japan out of the mix,
and there too, Pritchard did not disappoint.

Those who think deflation is harmless should listen to the Bank of Japan's
Haruhiko Kuroda, who has lived through 15 years of falling prices. Corporate
profits dried up. Investment in technology atrophied. Innovation fizzled
out. "It created a very negative mindset in Japan," he said.

Japan had the highest real interest rates in the rich world, leading to
a compound interest spiral as the debt burden rose on a base of shrinking
nominal GDP.

Cure Worse Than the Disease

The ridiculousness of that last statement should be obvious. Japan has a debt
burden because of its deflation fighting actions for three decades.

Before Japan embarked on its deflation-fighting mission, it had no debt at
all. Now it has the largest debt-to-GDP ration in the industrial world.

Pritchard Wonders "Why?"

Any such outcome in Europe would send Club Med debt trajectories through
the roof. It would doom all hope of halting Europe's economic decline or
reducing mass unemployment before the democracies of the afflicted countries
go into seizure. So why are they letting it happen?

Silly Question of the Day

Here's the silly question of the day: Why are they letting it happen?

Here's a better question: Why did Argentina, Turkey, South Africa, India,
Brazil, Indonesia, and every other country that tightened recently wait so
long to tighten?

Price inflation was running rampant in every one of those countries. The stock
market bubbles in India and Turkey are massive. The housing bubble in India
is massive.

But central bankers cannot see bubbles. Pritchard mentions bubbles but chooses
to ignore them. Arguably, that's even sillier than not seeing them at all.

Falling Prices a Bad Thing?

Pritchard's only concern is with falling prices, as if falling prices are
a bad thing.

Ask anyone in Japan, the US, Europe, or India if they would like to see falling
prices. The only people who don't want falling prices are central bankers,
economic illiterates, and Wall Street types and banks dependent on ever-growing
asset bubbles (because of bad loans made on speculative-priced assets).

Demise of Japan Coming Up

For all the pissing and moaning about Japan, until the revival of GM, Japan's
auto and technology sales did quite fine. Technology did not stop.

Reflections on "Letting it Happen"

Deflation is actually the natural state of affairs. As a result of increased
productivity, prices should drop over time, with more goods available at cheaper
prices, to the benefit of everyone!

And in spite of the ridiculous notion that people will hold off on consumer
purchases if prices drop, it's actually the other way around. Falling prices
and bargains spur sales.

If falling prices stopped sales, there would have been no sales of flat-panel
TVs, computers, or any other electronic devices for years.

If the price of healthcare dropped, people would have more money to spend
on other things, and spend they would.

It's asset prices, not consumer prices, where people stay away when prices
are falling. That makes asset bubbles all the more dangerous.

Obama Irony

Consider the irony of this statement by President Obama in his state of the
union address.

"Today, our housing market is finally healing from the collapse of 2007.Home
prices are rising at the fastest pace in six years, home purchases are
up nearly 50 percent, and construction is expanding again. But even with
mortgage rates near a 50-year low, too many families with solid credit who
want to buy a home are being rejected."

"We gotta blow a new housing bubble somehow! We're already half-way there
apparently. It hasn't occurred to the president that the first sentence highlighted
above is the main cause of what he bemoans in the second highlighted sentence."

Asset Bubbles the Biggest Threat to Banking

The only possible context in which deflation can be considered bad is the
effect it has on banks and bank lending. Yet, that puts the cart before the
horse.

It's not deflation that causes the problem, it's increasing loose monetary
standards that create asset bubbles (on which much lending is based) that is
the real problem. The bigger the asset bubble, the bigger the ultimate threat
to banking!

Yet Pritchard wants to ignore all that. He wants more of the same "do something" actions
of central bankers that created the very problems we have now.

Deflation Fighting (Inflation Promotion) Does Five Things

It increases government debt (as Japan found out)

It promotes asset bubbles

It delays the inevitable bust, making matters worse in the mean time

It creates moral hazards

It is a major factor in rising income inequality

What the Crisis Taught Us

Lagarde warns "What the crisis has taught us is that we need to be extremely
vigilant and expect bubbles from places that we don't anticipate."

Apropos Warning

Lagarde warns about the failure to anticipate bubbles. Her warning is very
apropos!

Central banks never anticipate bubbles. Lagarde cannot even see the huge bubbles
that are about ready to explode in her face.

Meanwhile, Pritchard wants to ignore bubbles in order to prevent deflation,
and Obama complains about income inequality when the source of rising income
inequality is Fed policies that create asset bubbles.

Lessons Not Learned

Ultimately, all bubbles burst, and the bursting of economic bubbles is the
very asset-deflation they need to prevent. And the only way to prevent asset
bubbles from bursting is to not blow them in the first place.

Clearly the crisis did not teach any of them, anything at all.

Wine Country Conference II

The deflation deflation debate continues. Want a live discussion of the issues
and forces? Want to learn something?

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Last conference, we arranged wine tours. They were a big hit. We will do so
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Stay an extra day and golf or travel. I did. The conference hotel is a fun
place in and of itself.

Unlike many other conferences, you will have easy access to speakers.

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Not only do we have an excellent lineup of speakers, you will have an opportunity
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